The end of the year can sometimes feel like a financial time warp. On the one hand, looking back on how the previous year went and understanding how much was earned, spent, and saved is essential. On the other hand, it is a great time to think about the future and calibrate yourself with an actionable plan that provides financial flexibility and discipline to live a responsible life.
In this final Common Cents article of 2023, I would like to share some thoughts and ideas on how to approach reviewing your financial past and plan for your financial future so that you can maximize your financial present!
Reflecting on 2023: Where Did Our Money Go?
- Gather Your Financial Data:
Start by collecting all your financial statements: bank accounts, credit cards, loans, and investment accounts. At the very least, take the total balances on every bank and investment account at the beginning of the year and subtract them from the total balances on those same (plus any new) accounts at the end of the year. For example, suppose the January monthly statements showed a $5,000 checking account balance, $14,000 in a high-yield savings account, $5,000 in a Roth IRA, and $10,000 in an employer 401K. In that case, you have a total opening balance of $34,000. If the balances at the end of the year are $5,500, $16,000, $7,000, and $14,000 in those same accounts at the end of the year, the total ending balance is $42,500 – an annual increase of $8,500 in your financial assets.
- Categorize Your Spending:
Break down your expenses into housing, utilities, groceries, entertainment, and education categories – all the basic categories people spend on. Personal finance apps can help automate and simplify this tedious but critical exercise. Nerd Wallet recently published an excellent article reviewing the best budget apps online. At Northbrook Financial, we use a financial planning app clients use to build customized budgets and track progress over time.
- Analyze Irregular Expenses:
Don’t overlook annual or semi-annual payments like insurance premiums or car maintenance. These can be significant and should be accounted for in your monthly budget. I recommend taking an annual payment, dividing it by 12, and using that as the amount to include in your monthly budget. Granted, your budget won’t match the month’s activity exactly, but an essential lesson of personal finance is that you rarely have months that perfectly fit your financial expectations. That’s just life. Be reasonable and move on!
- Reflect on Your Financial Goals:
Did you achieve the financial milestones you set for 2023? Understanding the gap between your goals and reality can help pinpoint where to adjust.
Implementing a “Pay Yourself First” Plan for 2024
- What Does “Pay Yourself First” (PYF) Mean?
Paying yourself first means prioritizing savings and investments before any other expenses. It’s about treating your future self as the most critical bill you must pay. At Northbrook Financial, we include “PYF” accounts within a client’s monthly budget to help reinforce the mentality of proactively saving and investing.
- Set Clear, Achievable Goals:
Identify what you’re saving for – retirement, college funds, or an emergency reserve. Having specific targets makes it easier to stay disciplined.
- Calculate Your Disposable Income:
Subtract your essential expenses (housing, utilities, food) from your total income to understand what you could save. Focus on the essential expenses to calculate what you can save – anything left over is yours to spend as you see fit. This helps people follow through on savings and feel financially flexible to spend whatever is left over after savings.
- Automate Your Savings:
Set up automatic transfers to your savings and investment accounts right after you get paid. This ensures you save before you have the chance to spend.
Tips for Tracking and Boosting Cash Flow in 2024
- Cut Unnecessary Costs:
Analyze your spending categories and identify what you can reduce or eliminate. Small changes can lead to significant savings over time.
- Review and Adjust Regularly:
Make it a habit to review your budget and savings plan monthly. As your life changes, your financial plan should too. Clients at Northbrook Financial are coached on reviewing cash flow monthly and then fall into a routine that is very empowering and does not take a lot of time.
- Plan for Large Purchases:
If you anticipate a significant expense (like a vacation or a new appliance), set aside money months in advance in a high-yield savings account.
- Work with a professional:
Scheduling time with a fee-only fiduciary financial planner can help people looking to get started with a solid savings and cash management plan. In our practice, we start every client engagement with a detailed review of cash flow management and build a reasonable budget and accountability plan to track over the year.
As 2023 ends and 2024 beckons, taking control of your financial future is more important than ever. By understanding where your cash has flowed in the past year and implementing a “pay yourself first” strategy, you’re setting the stage for a wealthier and more secure future. Remember, the journey to financial freedom is a marathon, not a sprint. Keeping your finances on track takes time, discipline, and regular review. Here’s to a prosperous and financially savvy 2024 for you and your family!
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA
Northbrook Financial is an Investment Adviser registered with the State of Maryland. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. Please contact us at 410-941-9709 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate or modify any restrictions on the management of the account. Our current disclosure brochure, Form ADV Part 2, is available upon request, and on our website https://www.northbrookfinancial.com